7/02/2008 @ 10:05AM

Netflix's Online Movie Dreams

Saratoga, Calif.-based Roku, best known for its networked music player SoundBridge, in May rolled out a set-top box that streams Netflix
movies. The company, in which Los Gatos, Calif.-based Netflix owns a minority stake, says it sold out its first shipment in three weeks. To keep up with demand, Roku has ramped up production in its factory in Asia and is air-freighting units to the U.S., says Tim Twerdahl, Roku’s vice president of consumer products.

Twerdahl wouldn’t disclose sales figures, but he says Roku calculated initial shipments based on sales of competing digital delivery products such as
Apple
TV and Vudu. Twerdahl also says the Roku player won’t be limited to Netflix. Later this year, a simple software update will allow the box to stream content from other “big name” providers.

In addition to Roku, Netflix has also partnered with LG Electronics and two other suppliers of set-top boxes. Microsoft‘s
Xbox is said to be a potential partner.

Apparently consumers like the idea of a relatively cheap media player that streams Netflix movies free. For $100, Roku supplies you with a diminutive black box, a remote, power adapter and a basic audio/video cable. While the box may be smaller than a paperback copy of Clear and Present Danger, its dull, utilitarian exterior doesn’t win any aesthetic wars. Fortunately, it makes up for its lackluster looks with a simple set-up and interface.

Set up takes mere minutes. After plugging in the various cables, registering the player with your Netflix account and waiting a brief moment while the player syncs, you’re ready to go. The box automatically pulls “instant” movies from your Netflix queue, but you can’t add movies directly to the box.

With the simple remote control, you can scroll through films, and call up descriptions and member ratings. Once you’ve decided on a movie to play–we went with The King of Kong documentary–it took 25 seconds for the film to start streaming on a wired Internet connection with a 10 megabytes per second download speed. There were no hiccups. Image quality was indistinguishable from a DVD.

The major hurdle facing Roku’s player and other set-top box products in the pipeline for this fall is the size of Netflix’s streaming library. Almost a year-and-a-half old, only 10% of Netflix’s DVD library is available for instant viewing. While 10,000 titles isn’t shabby, the selection is too small for film aficionados. But considering that the one-time purchase fee of a Roku box is approximately $130 cheaper than Apple TV, it’s a decent alternative to watching DVDs that complements your Netflix subscription.

Netflix Chief Executive Reed Hastings has predicted that sales of DVD rentals will peak as early as 2013. That’s why the company is partnering with set-top box makers and has also been investing in streaming video technology. In 2007, Netflix shelled out $71 million for technology and development–that’s a 48% increase over 2006′s expenses. A large chunk of that went toward its “Watch Instantly” Internet delivery system.

If the Roku set-top box success is any indication, Netflix should be in good shape to weather the looming streaming video torrent.